The IMF's forecast for global growth of 4.3 per cent this year and next is virtually unchanged from its April forecast. Announcing the modest reduction in its twice-yearly World Economic Outlook, the IMF said the impact of recent leaps in the price of oil on growth and inflation had been “surprisingly moderate”.

But the high oil price remained a “clear and present danger” for growth and inflation, Raghuram Rajan, IMF chief economist, said. In particular, high energy prices would hurt consumer confidence and lead to accelerating inflation.

The fund predicted the world economy had the momentum to withstand a rise in market-determined interest rates from very low levels, but warned that rising inflation expectations could lead to a sharp tightening of financial market conditions. It also warned that global growth remained overly dependent on the US and China, and growing global current account imbalances were a key medium-term risk.

There was a further immediate danger, it said, from rising protectionist pressures, particularly in the US and Europe, as a result of trade imbalances and fear of competition from emerging market countries.

Trade imbalances and oil prices will be key subjects at a meeting of finance ministers and central bankers from the Group of Seven leading industrialised countries in Washington tomorrow and at the meetings of ministers who oversee the International Monetary Fund on Saturday.

The IMF raised its forecast for the US current account deficit to 6.1 per cent of gross domestic product this year and next more than it had forecast in April. “On the surplus side, the key counterparts are Japan, China, the Middle East oil exporters, which as a result of soaring oil prices are now running a larger surplus in US dollar terms than emerging Asia,” it said.

In many countries the IMF made small reductions to the growth outlook, and small increases in the inflation forecast. One exception was Japan, where the fund sharply increased its 2005 growth outlook by 1.2percentage points to 2 per cent.

It pointed to a stronger labour market, supporting consumer spending growth, and strong business investment, and forecast that 2 per cent growth would be maintained next year. But it said the Japanese central bank should maintain its accommodative monetary stance until there was evidence that “deflation is unambiguously defeated”.

In Latin America it maintained its forecast for 4.1 per cent growth this year, down from the 5.7 per cent pace of 2004, but observed that many of the region's economies had become “more resilient”.

Meanwhile, it identified the eurozone, which had faltered again as final domestic demand had slowed, as a key risk to the global outlook. There were substantial cuts to its growth forecast to just 1.2 per cent this year and 1.8 per cent in 2006.

In the US, where the IMF shaved its forecast for growth to 3.5 per cent this year and 3.3 per cent in 2006, it said the Federal Reserve should continue raising interest rates, taking into account rises in energy prices and the disruption in the US Gulf region from Hurricane Katrina, but highlighting rising unit labour costs and the danger that energy prices would feed into core inflation.

The Fed raised rates a quarter point to 3.75 per cent on Tuesday, Financial Times reports.